Market Briefing - Turnaround Tuesday?

- Global markets are trading on a slightly stronger footing after yesterday’s brutal session. A late-afternoon spike in bond yields was touched off by a Wall Street Journal article (written by the impeccably-sourced Nick Timiraos) that suggested Federal Reserve officials were likely considering hiking rates by three quarters of a percentage point at this week’s meeting. Equities plunged, commodities weakened, and the dollar climbed higher. 

- The Fed generally tries to avoid surprising markets, but the nature of Friday’s data - high realized inflation and rising consumer expectations - paired with what increasingly appears to have been a behind-the-scenes media outreach effort, suggests a 75 basis point move has become more likely than not. Market-implied odds on the biggest move since 1994 have risen above the 95 percent thresdhold. 

Implied 3-month volatility in the DXY dollar index has hit levels last seen during the coronavirus selloff in March 2020. This could indicate that the dollar is nearing a turning point: given extraordinarily-high expectations, the greenback is clearly vulnerable to a buy-the-rumour / sell-the-news reaction after tomorrow’s decision, and interest differentials should narrow in coming weeks as other central banks catch up. At some point, growing odds on rate cuts in 2023 and 2024 are likely to begin putting pressure on the middle of the yield curve. 

- The Canadian dollar continues to fall toward the 1.30 mark, pummelled by a broader diminishment in global risk appetite. Tomorrow’s housing starts data - not normally a market mover - might shed light on how conditions are evolving in what has become an internationally-recognized real estate bubble. A pronounced slowdown in the housing market could weigh on expectations for the Bank of Canada’s tightening path. 

- China will publish a series of economic data releases this evening, with fixed asset investment, industrial production, and retail sales numbers likely to exhibit scarring from wide-ranging coronavirus lockdowns in April and May - but nascent signs of recovery should also be visible, given the government’s attempts to loosen liquidity conditions and support business activity. 

- The yen is trading within a tightly-constrained range after Japanese Finance Minister Shunichi Suzuki signalled more unease last night, telling reporters, “We’re concerned about the recent sudden further weakening of the yen in the currency markets” - moving incrementally closer to the sort of language that has historically preceded intervention efforts. 

- Friday’s Bank of Japan meeting could prove absolutely critical for global currency markets, with an upward adjustment in the central bank’s yield curve control framework looking increasingly possible. 

- If Governor Kuroda signals a tightening in Japanese policy, four of the last decade’s biggest sources of global liquidity - central bank asset purchases, emerging market reserve accumulation, outward investment flows from Europe, and the yen-denominated carry trade - may have gone into reverse by the end of the first half. 

Have a great day!

EVENTS

TUESDAY

USD  Producer Price Index, May

WEDNESDAY

CAD Housing Starts, May

USD    Retail Sales, May

EUR    European Central Bank Speech, Panetta

USD    Department of Energy Weekly Inventories

EUR    European Central Bank Speech, Lagarde

USD    Federal Reserve Rate Decision

BRL    Central Bank of Brazil, Rate Decision

THURSDAY

EUR European Central Bank Speech, Panetta

GBP    Bank of England, Rate Decision

USD    Weekly Jobless Claims

FRIDAY

JPY    Bank of Japan, Rate Decision

USD   Federal Reserve Conference on Dollar's Role

USD   Baker Hughes Weekly Rig Count